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People downsizing, homes listed as rentals impacting apartments

NORTH BAY - Rising unemployment together with a struggling economy and a large number of foreclosed homes are driving down rents for apartments and income homes.

Pressure on rents is coming from renters who are looking to save money after losing a business or job, according to property investment brokers and managers.

In a six-apartment Sausalito complex, Katherine Higgins, a broker and owner of the property, had couples replacing singles in two of three units vacated in a three-month period recently.

"Couples that were making good money and living in luxury rentals are now downsizing to one-bedroom apartments to save on rent and ride out the job insecurity," said Ms. Higgins of Bradley Real Estate in San Rafael.

Ms. Higgins had to lower the rent to fill the apartments.

Kirsten Strain, an investment property agent with NAI BT Commercial in Santa Rosa, said rental-market pressure has come from not only renters moving to lesser-expensive housing, but also from the so-called "shadow rental" market, which are single-family homes for rent.

"There are four roommates in a two-bedroom unit versus two roommates each having their own room, more tenants are moving back to the family home and more single-family residences are being offered up as rentals," she said.

This shadow rental market has been estimated to capture half of rental demand traditionally, and that share has been growing in recent years, according to a report on slumping apartment demand by CBRE Torto Wheaton Research. Instead of demand for rentals nationally dropping as it did with the 2001 economic recession, total rental demand grew by 2.1 percent, or 700,000 households.

Senior CBRE economist Gleb Nechayev noted four major reasons for a decline in apartment demand but an increase in overall rental demand. Three of them have to do with families with children looking for larger rentals, having trouble meeting credit requirements for larger complexes after a foreclosure or bankruptcy and preferring to live in the children's school district.

Shadow rentals are having a strong impact on high-end apartments, according to Suzette Beck, whose department at Eugene Burger Management Corp. specializes in single-family or few-unit income properties and currently manages 420, mostly in Sonoma County.

"For a while owners of nicer apartments were charging a lot for units  with newer construction, amenities and location," she said, pointing to the relatively high-value Fountaingrove area of northeast Santa Rosa as a key example. "There were properties where we saw a $400 to $500 a month reduction in rent, and now you can have a single-family home for $50 to $100 a month more than an apartment."

High-rent apartments in Marin County are under pressure as well. Southern Marin County units being marketed for more than $2,000 a month are leasing slowly, according to Ms. Higgins of Bradley Real Estate. In central Marin multifamily property owners are giving up rent increases gained from 2002 through last year.

"Rents will most likely decline by about 10 percent as renters become owners again or relocate to another city or state in pursuit of employment," Ms. Higgins said.

In Napa County, significant changes in the number of hospitality-related jobs, a major source of renters, has been pushing down rents 5 percent, or $50 to $100 a month, according to Mindy Wyman of Napa's Hedgerow Property Management, which handles about 600 multi- and single-family homes mostly in the county.

"There was a long stretch from five years ago to two years ago when we weren't increasing rents, but we were not bringing them down," she said. Now tenants, even in the top-end rentals, are calling to point out competing properties and demand rent reductions to keep them, she said.

Meanwhile, deferring maintenance to preserve cash is common when the rental market is slow, but it creates a spiraling situation in which a property can garner less rent and lose tenants to better-maintained properties, according to apartment investment broker Dave Buurma of NAI BT Commercial in Napa.

"Those owners who are really stepping out on a limb and willing to fix up properties will really do well on rents," he said.

For example, two multifamily properties Mr. Buurma is preparing to market for sale in Vallejo have been able to increase rents and have waiting lists because they have been well-maintained, while the multifamily rental market in the city has softened substantially as owners have deferred upkeep.

Nancy Lanz, whose Santa Rosa-based Charter Hill Rentals manages 50 mostly single-family local homes, is encouraging her clients to pursue renovations that many renters want, namely energy-efficiency upgrades, such as better insulation and dual-pane windows. One owner is putting $30,000 into preparing a home for rent.

She's encouraging clients to seek loans for such upgrades through the Sonoma County Energy Independence Program, spreading out the high up-front cost over 15 years with assessments on property-tax bills.

"The homes renting the fastest are those current in design style and energy efficiency," she said. "People are turning down properties with single-pane windows."